Chapter 19 - Summary
Explain how fixed, variable, and semivariable costs respond to changes in the
volume of business activity.
Fixed costs (fixed expenses) remain unchanged despite changes in sales volume,
while variable costs (or expenses) change in direct proportion to changes in
sales volume. With a semivariable cost, part of the cost is fixed and part is
variable. Semivariable costs change in response to a change in the level of
activity, but they change by less than a proportionate amount.
Explain how economies of scale can reduce unit costs.
Economies of scale are reductions in unit cost that can be achieved through
a higher volume of activity. One economy of scale is fixed costs that are spread
over a larger number of units, thus reducing unit cost.
Prepare a cost-volume-profit graph.
The vertical axis on a break-even graph is dollars of revenue or costs, and
the horizontal axis is unit sales. Lines are plotted on the graph showing revenue
and total costs at different sales volumes. The vertical distance between these
lines represents the amount of operating income (or loss). The lines intersect
at the break-even point.
Compute contribution margin and explain its usefulness.
Contribution margin is the excess of revenue over variable costs. Thus it represents
the amount of revenue available to cover fixed costs and to provide an operating
profit. Contribution margin is useful in estimating the sales volume needed
to achieve earnings targets, or the income likely to result from a given sales
Determine the sales volume required to earn a desired level of operating income.
The sales volume (in units) required to earn a target profit is equal to the
sum of the fixed costs plus the target profit, divided by the unit contribution
margin. To determine the sales volume in dollars, the sum of the fixed costs
plus the target profit is divided by the contribution margin ratio.
Use the contribution margin ratio to estimate the change in operating income
caused by a change in sales volume.
Multiplying the expected dollar change in sales volume by the contribution
margin ratio indicates the expected change in operating income.
Use CVP relationships to evaluate a new marketing strategy.
An understanding of CVP relationships assists managers in estimating the changes
in revenue and in costs which are likely to accompany a change in sales volume.
Thus they are able to estimate the likely effects of marketing strategies on
An understanding of cost behavior--the manner in which costs normally respond
to changes in the level of activity--is required in each remaining chapter of
this textbook. In these chapters, we will explore the use of accounting information
in evaluating the performance of managers and departments, in planning future
business operations, and in making numerous types of management decisions. The
concepts and terminology introduced in Chapter 19 will be used extensively in